GARY — A financial adviser assisting Gary in a controversial, multimillion-dollar bond issue allegedly failed to protect the interests of another client — the city of Harvey's library district — on a separate, $6 million bond issue, court records show.
The Securities Exchange Commission charged the Mississippi-based municipal adviser Comer Capital Group, LLC, and Brandon Comer, of Gary, for leading astray their client, the Harvey Library District, in 2014, when pursuing bonds for building expansions.
As a result, the pricing of the bonds ultimately was "not fair and reasonable," and the Harvey, Illinois, district anticipates being forced to pay at least $500,000 in additional interest over the life of the bond, SEC records show.
The small library district — described by the SEC as "unsophisticated" in the bond offering process — hired Comer Capital, which is majority-owned and controlled by Comer, in late 2014 to advise the district on the selection of an experienced underwriter and pricing of the bonds, federal documents show.
Comer reportedly was not selected through the competitive bidding process. Instead, the firm was hired the same day of Comer's interview.
Gary mayor: Just allegations
The city of Gary hired Comer last year to advise them on the administration's plan to sell and lease back its public safety building for up to $40 million. The financial arrangement essentially would free up capital and provide revenue in the city's coffers to keep government running, proponents of the plan have argued.
However, critics of the Gary plan, including mayoral heir-apparent Jerome Prince, have dubbed the sale and leaseback as an ill-advised shell game that would put the city on the hook for up to $80 million in high-interest payments while only placing a Band-Aid on current city financial woes.
News of the Comer troubles with the SEC comes as some city officials say investors already are beginning to walk away from the controversial Gary sale and leaseback plan.
Mayor Karen Freeman-Wilson said she doesn't believe the SEC allegations will impact Comer's working relationship as financial adviser for Gary government.
"I think that while it’s certainly something that is serious and is not to be cast aside, the circumstances underlying that issue are totally different from the work he’s doing with us," Freeman-Wilson said.
The mayor said multiple financial advisers, including accountant Curtis Whittaker, are advising the city on the sale/leaseback deal — not only Comer.
The larger part of Comer's work on the deal is done, she added.
"Certainly, you don’t want any person or entity involved in your transaction that has a cloud, and so yes, it is a cause for concern — but not a cause to terminate his working relationship with the city," she said. "Because the work, in large part, has been done, and he did what we needed to get done in terms of providing a list of potential bankers, interviewing them and determining who the best banker was."
Freeman-Wilson said Comer specifically was hired by Gary as a financial consultant because of his reputation working with cities with fiscal challenges.
SEC: Comer acted inappropriately
The SEC complaint alleges Comer did not properly advise the Harvey Library District on the qualifications of the bond underwriter.
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Upon learning the underwriter was having difficulty finding investors to buy the bonds, Comer and Comer Capital did not consider or recommend the district consider engaging a different or an additional broker-dealer to underwrite the bonds, according to an SEC news release.
"Instead, Comer Capital and Comer deferred entirely to the underwriter of the Bonds, IFS Securities, on the sale and pricing of the District's bonds," the complaint states. Comer Capital's contract, however, required they establish pricing benchmarks, oversee the pricing of the bonds and conduct historical pricing analyses, among other services.
Federal documents show the library director had no experience with bonds, and IFS only became involved in the deal because a member of the library district's board of trustees was acquainted with a person who later became associated with IFS, federal records show.
Comer also initially sought a flat fee of $20,000 and ultimately asked IFS to negotiate a higher fee on Comer Capital's behalf. Two days before the bond transaction closed, they negotiated a fee increase to $40,000 for Comer, federal records show.
"A municipal adviser owes a fiduciary duty to the issuer and must deal honestly and with the utmost good faith and act in the client's best interest without regard to their own financial or other interests," the SEC complaint states. "As a representative of the issuer, a municipal adviser is in arms-length relationship with the underwriter. It was therefore inappropriate, and a breach of fiduciary duty, for Comer to ask IFS to intercede with the District and renegotiate Comer Capital's fee on Comer Capital's behalf."
Asked if she feels comfortable working with someone accused of such misconduct, Gary Mayor Freeman-Wilson said the SEC filings are "just allegations" at this time.
"I feel comfortable that he discharged his duty to the city of Gary with professional integrity. I also understand before the SEC is an allegation, and I don’t think anyone would want to be judged solely on an allegation," she said. "Whenever you walk into court, there’s a presumption of innocence. Guilt has to be proven."
The SEC is seeking permanent injunctions preventing Comer from further SEC violations. The commission also is requesting Comer pay back any ill-gotten gains and civil penalties. The SEC launched a separate investigation last summer into the source of the $6 million bond used to fund the Harvey library district's improvements.
Future of deal uncertain
Jerome Prince, the likely successor to Mayor Karen Freeman-Wilson following his Democratic primary win this spring, publicly decried the administration’s sale/leaseback plan last week.
He said the sale/leaseback deal — which essentially boils down to a 20-year, high-interest loan — ties the future administration’s hands and is a bad deal for taxpayers.
The Gary Common Council approved the sale/leaseback of the building at 555 Polk St. to the Gary Building Corp., a nonprofit created for the sole purpose of owning and leasing facilities to city government.
Under state law, the city will sell the building for as much as $40 million, depending on an appraisal, then lease it back in a 20-year rental agreement. With an annual interest rate not to exceed 8%, the city could be on the hook paying back close to $80 million over the life of the loan.
City leaders have said the deal would generate $30 million in revenue for 2019 and another $5 million in 2020. The remaining $5 million would be used to pay existing debt and deal-structuring costs.
Council President Ronald Brewer could not be immediately reached for comment Monday regarding the SEC charges.
Last week, Brewer told The Times that investors previously committed to financing the sale/leaseback of the city's public safety building were now close to walking away from the table after Prince came out in opposition.